The Reserve Bank of India’s quarterly monetary policy review got top-line billing this month. The central bank settled for a CRR cut of fifty basis points with effect from January 28th. This cuts the cash reserve ratio to 5.5% and releases $6.5bn of additional liquidity into the system. Open market operations will also continue to prevent the additional government borrowing due to fiscal lassitude crowding out private sector loan demand. Political pump-priming for the state elections through early March will keep the RBI in conflict with the government over growth stimulus. A prudent Union Budget after the elections should allow policy rate cuts at the next RBI meeting in March.
Meanwhile, the RBI’S stated intentions are: to ease liquidity, to mitigate downside risks to GDP and to anchor medium term inflation expectations. The government is to switch to monthly reporting of food and fuel inflation numbers in a further attempt to assure the quality of the information.
Momentum is picking up, however, largely driven by a resurgence of foreign interest. This has brought India from the bottom to the top of the global equity market league in the space of a month and valuations are still near historical lows. If the economic data stay within the RBI’s target ranges, this should continue.ICEMAN